<PAGE>

--------------------------------------------------------------------------------

                  UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, D. C. 20549
                                          
                                     FORM 10-Q
                                          
(Mark One)
 
X    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

For the quarter ended October 31, 1998 
OR

_    TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

For the transition period from ________ to __________

                          Commission file number 333-20031


                                NEOMAGIC CORPORATION
               (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
     
             DELAWARE                                     77-0344424  
     (State or other jurisdiction                      (I.R.S. Employer 
    of incorporation or organization)                 Identification No.)

           3260 Jay Street
        Santa Clara, California                             95054
 (Address of principal executive offices)                 (Zip Code)


                                  (408) 988-7020
                (Registrant's telephone number, including area code)


Indicate by check mark whether the Registrant (1) has filed all reports 
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act 
of 1934 during the preceding 12 months ( or for such shorter period that the 
registrant was required to file such reports), and (2) has been subject to 
such filing requirements for the past 90 days.  

                              Yes  X               No

    The number of shares of the Registrant's Common Stock, $.001 par value 
            per share, outstanding at November 29, 1998 was 24,804,192
                                          
--------------------------------------------------------------------------------
                                          
                                   Page 1 of 23

<PAGE>

                                NEOMAGIC CORPORATION
                                     FORM 10-Q
                                          
                                       INDEX

                                                                         PAGE
PART I.   CONSOLIDATED CONDENSED FINANCIAL INFORMATION

Item 1.   Unaudited Consolidated Condensed Financial Statements:


          Consolidated Condensed Statements of Income
               Three and nine months ended October 31, 1998 and 1997       3

          Consolidated Condensed Balance Sheets
               October 31, 1998 and January 31, 1998                       4

          Consolidated Condensed Statements of Cash Flows
               Nine months ended October 31, 1998 and 1997                 5
     
          Notes to Unaudited Consolidated Condensed Financial Statements   6-7
     
Item 2.   Management's Discussion and Analysis of
          Financial Condition and Results of Operations                    8-21


PART II.  OTHER INFORMATION
          
Item 1.   Legal Proceedings                                                22

Item 2.   Changes in Securities and Use of Proceeds                        22

Item 3.   Defaults Upon Senior Securities                                  22

Item 4.   Submission of Matters to a Vote of Security Holders              22

Item 5.   Other Information                                                22

Item 6.   Exhibits and Reports on Form 8-K                                 22

Signatures                                                                 23


                                  Page 2 of 23

<PAGE>

PART I.  FINANCIAL INFORMATION
ITEM I.  FINANCIAL STATEMENTS

                                NEOMAGIC CORPORATION
                    CONSOLIDATED CONDENSED STATEMENTS OF INCOME
                       (In thousands, except per share data)
                                    (Unaudited)

<TABLE>
<CAPTION>
                                                            Three Months Ended                Nine Months Ended
                                                                 October 31,                      October 31,
                                                        -------------------------   -----------------------------
                                                           1998           1997              1998           1997
                                                        -------------------------   -----------------------------
<S>                                                     <C>            <C>              <C>             <C>
Net sales                                               $  67,401      $  37,146        $  168,535      $  79,997
                                                                                    
Cost of sales                                              40,436         21,568            99,004         47,261
                                                        -------------------------   -----------------------------
                                                                                    
Gross margin                                               26,965         15,578            69,531         32,736
                                                                                    
Operating expenses:                                                                 
  Research and development                                  8,729          4,924            22,295         10,729
  Sales, general and administrative                         5,845          3,452            15,049          8,111
                                                        -------------------------   -----------------------------
               Total operating expenses                    14,574          8,376            37,344         18,840
                                                        -------------------------   -----------------------------
                                                                                    
Income from operations                                     12,391          7,202            32,187         13,896
                                                                                    
Other income (expense):                                                             
  Interest income and other                                 1,039            823             2,933          1,785
  Interest expense                                           (245)          (325)             (941)          (863)
                                                        -------------------------   -----------------------------
                                                                                    
Income before income taxes                                 13,185          7,700            34,179         14,818
                                                                                    
Provision for income taxes                                  4,615          1,155            11,963          2,223
                                                        -------------------------   -----------------------------
                                                                                    
Net income                                              $   8,570      $   6,545        $   22,216      $  12,595
                                                        -------------------------   -----------------------------
                                                        -------------------------   -----------------------------
                                                                                    
Basic earnings per share                                $     .36      $     .29        $      .94      $     .58
Diluted earnings per share                              $     .33      $     .25        $      .85      $     .50
                                                                                    
Weighted common shares outstanding                         23,828         22,713            23,573         21,573
Weighted common shares outstanding,                                                 
    assuming dilution                                      25,950         26,144            26,027         25,145
</TABLE>


       See accompanying notes to consolidated condensed financial statements.


                                  Page 3 of 23

<PAGE>

                                NEOMAGIC CORPORATION
                       CONSOLIDATED CONDENSED BALANCE SHEETS
                                   (In thousands)
                                    (Unaudited)

<TABLE>
<CAPTION>
                                                      October 31,    January 31,
                                                          1998           1998
                                                      -----------   ------------
<S>                                                   <C>           <C>
                                        ASSETS
Current assets: 
  Cash and cash equivalents                             $  52,164     $   35,004
  Short-term investments                                   22,184         36,016
  Accounts receivable, net                                 17,511         11,236
  Inventory                                                 8,117          9,342
  Other current assets                                      9,194          3,730
                                                      -----------   ------------
         Total current assets                             109,170         95,328

Property and equipment, net                                 8,322          6,232
Deferred tax assets                                         5,669          5,669
Other assets                                                  798            354
                                                      -----------   ------------
         Total assets                                   $ 123,959     $  107,583
                                                      -----------   ------------
                                                      -----------   ------------

                         LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Working capital line of credit                        $       -     $   21,041
  Accounts payable                                         19,682          9,490
  Accrued expenses                                         13,391         10,652
  Obligations under capital leases                            839          1,273
                                                      -----------   ------------
         Total current liabilities                         33,912         42,456

Commitments and contingencies

Stockholders' equity:
  Common stock                                                 26             24
  Additional paid-in-capital                               63,094         61,263
  Notes receivable from stockholders                         (554)          (559)
  Deferred compensation                                    (1,935)        (2,801)
  Retained earnings                                        29,416          7,200
                                                      -----------   ------------
         Total stockholders' equity                        90,047         65,127
                                                      -----------   ------------
                                                        
         Total liabilities and stockholders' equity     $ 123,959     $  107,583
                                                      -----------   ------------
                                                      -----------   ------------
</TABLE>


       See accompanying notes to consolidated condensed financial statements.

                                  Page 4 of 23

<PAGE>

                               NEOMAGIC CORPORATION 
                  CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                   (In thousands)
                                    (Unaudited)

<TABLE>
<CAPTION>
                                                                         Nine Months Ended
                                                                            October 31,
                                                                      -------------------------
                                                                         1998           1997
                                                                      ----------      ---------
<S>                                                                   <C>             <C>
OPERATING ACTIVITIES:
Net income                                                             $  22,216      $  12,595
Adjustments to reconcile net income to net cash provided by
  operating activities:
     Depreciation and amortization                                         2,291          1,148
     Amortization of deferred compensation                                   657            540
     Changes in operating assets and liabilities:
           Accounts receivable                                            (6,275)        (7,954)
           Inventory                                                       1,225          1,089
           Other current assets                                           (5,464)          (186)
           Other assets                                                     (444)          (103)
           Accounts payable                                               10,192          2,232
           Accrued expenses                                                2,739          4,471
                                                                      ----------      ---------
Net cash provided by operating activities                                 27,137         13,832
                                                                      ----------      ---------
                                                                      ----------      ---------

INVESTING ACTIVITIES:
     Purchases of property and equipment                                  (4,381)        (3,003)
     Purchases of short-term investments                                 (30,242)       (47,265)
     Maturities of short-term investments                                 44,074          9,000
                                                                      ----------      ---------
Net cash provided by (used for) investing activities                       9,451        (41,268)
                                                                      ----------      ---------
                                                                      ----------      ---------

FINANCING ACTIVITIES:
     Payments on lease obligation                                           (434)          (849)
     Proceeds from working capital line of credit                              -         36,695
     Payments on working capital line of credit                          (21,041)       (38,442)
     Net proceeds from issuance of common stock                            2,047         38,495
     Amounts held as restricted cash                                           -          2,224
                                                                      ----------      ---------
Net cash provided by (used for) financing activities                     (19,428)        38,123
                                                                      ----------      ---------
                                                                      ----------      ---------

Net increase in cash and cash equivalents                                 17,160         10,687
Cash and cash equivalents at beginning of period                          35,004         13,458
                                                                      ----------      ---------
Cash and cash equivalents at end of period                             $  52,164      $  24,145
                                                                      ----------      ---------
                                                                      ----------      ---------
Supplemental schedules of cash flow information
Cash paid during the year for:
     Interest                                                          $     941      $     863

     Taxes                                                             $   9,301      $   2,822
</TABLE>


       See accompanying notes to consolidated condensed financial statements.


                                  Page 5 of 23

<PAGE>

                                NEOMAGIC CORPORATION
           NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


1.  Basis of Presentation:

     The unaudited consolidated condensed financial statements have been 
prepared pursuant to the rules and regulations of the Securities and Exchange 
Commission and include the accounts of NeoMagic Corporation and its 
wholly-owned subsidiaries, collectively ("NeoMagic" or the "Company").  
Certain information and footnote disclosures, normally included in financial 
statements prepared in accordance with generally accepted accounting 
principles, have been condensed or omitted pursuant to such rules and 
regulations.  Certain prior year amounts have been reclassified to conform to 
the current year presentation.  In the opinion of the Company, the financial 
statements reflect all adjustments, consisting only of normal recurring 
adjustments necessary for a fair presentation of the financial position at 
October 31, 1998, the operating results for the three and nine months ended 
October 31, 1998 and 1997 and cash flows for the nine months ended October 
31, 1998 and 1997.  These financial statements and notes should be read in 
conjunction with the Company's audited financial statements and notes thereto 
for the year ended January 31, 1998, included in the Company's Form 10-K 
filed with the Securities and Exchange Commission.

     The results of operations for the nine months ended October 31, 1998 are 
not necessarily indicative of the results that may be expected for the year 
ending January 31, 1999.

     The third fiscal quarters of 1999 and 1998 ended on October 26, 1998 and 
October 27, 1997, respectively.  For ease of presentation, the accompanying 
financial statements have been shown as ending on the last day of the 
calendar month.

2.   Inventory:

     Inventory is stated at the lower of cost or market value.  Cost is 
determined by the first-in, first-out method.

<TABLE>
<CAPTION>
Inventory consists of:                                October 31,    January 31,
                                                         1998           1998
                                                      --------------------------
                                                             (in thousands)
<S>                                                   <C>             <C>

Raw materials                                            $  1,610       $    989
Work in process                                             1,772          1,904
Finished goods                                              4,735          6,449
                                                      --------------------------
    Total                                                $  8,117       $  9,342
                                                      --------------------------
                                                      --------------------------
</TABLE>


3.   Earnings Per Share

     The consolidated condensed financial statements are presented in 
accordance with Statement of   Financial Accounting Standards No. 128 ("SFAS 
No. 128"), "Earnings per Share." Basic earnings per common share are computed 
using the weighted average number of common shares outstanding during the 
period. Diluted earnings per common share incorporate the common equivalent 
shares from the incremental shares issuable upon the assumed exercise of 
stock options and warrants (using the treasury stock method). 


                                  Page 6 of 23

<PAGE>

Per share information calculated on this basis is as follows:
(in thousands, except per share amount)

<TABLE>
<CAPTION>

                                                                            Three Months Ended          Nine Months Ended
                                                                                October 31,                 October 31,
                                                                        -----------------------------------------------------
                                                                          1998           1997           1998           1997
                                                                        -----------------------------------------------------
<S>                                                                     <C>           <C>           <C>             <C>
Numerator:
    
     Net income                                                         $  8,570       $  6,545      $  22,216      $  12,595
                                                                        -----------------------------------------------------

Denominator:
     Denominator for basic earnings per share - weighted average
          shares outstanding                                              23,828         22,713         23,573         21,573
          
     Effect of dilutive securities:
         Employee stock options                                            2,034          3,328          2,365          3,355
         Warrants                                                             88            103             89            217
                                                                        -----------------------------------------------------
     Dilutive potential common shares                                      2,122          3,431          2,454          3,572
                                                                        -----------------------------------------------------
         Denominator for diluted earnings per share - 
             adjusted weighted-average shares outstanding                 25,950         26,144         26,027         25,145
Basic earnings per share                                                $    .36       $    .29      $     .94      $     .58
Diluted earnings per share                                              $    .33       $    .25      $     .85      $     .50
</TABLE>


4.   Stock Options
     
     In September 1998, the Board of Directors approved a resolution allowing 
employees to exchange their existing vested and unvested stock options for 
new options having an exercise price of $11.50 per share, the then current 
market price of the Company's common stock. Options to purchase 2,085,700 
shares, with an average original exercise price of $15.48 per share, were 
exchanged by employees.  Vested exchanged options are not exercisable by the 
employees until March 31, 1999.

5.   Comprehensive Income

     The Company adopted Statement of Financial Accounting Standards No. 130, 
"Reporting Comprehensive Income," ("SFAS 130") during the quarter ended April 
30, 1998.  SFAS 130 establishes new rules for the reporting and displaying of 
comprehensive income and its components; however, the adoption of this 
Statement had no impact on the Company's net income or stockholders' equity.  
SFAS 130 requires unrealized gains or losses on the Company's 
available-for-sale securities and foreign currency translation adjustments to 
be included in comprehensive income.  Gross unrealized gains and losses on 
available-for-sales securities and foreign currency translation adjustments 
at October 31, 1998 and 1997 were immaterial.
     
6.   Recently Issued Accounting Pronouncements
     
     In June 1998, the Financial Accounting Standards Board issued Statement 
No. 133, Accounting for Derivative Instruments and Hedging Activities, 
effective for fiscal years beginning after June 15, 1999. The standard will 
require the Company to recognize all derivatives on the balance sheet at fair 
value. Derivatives that are not hedges must be adjusted to fair value through 
income. If the derivative is a hedge, depending on the nature of the hedge, 
changes in the fair value of the derivative are either offset against the 
change in fair value of assets, liabilities, or firm commitments through 
earnings or recognized in other comprehensive income until the hedged item is 
recognized in earnings. The change in a derivative's fair value related to 
the ineffective portion of a hedge, if any, will be immediately recognized in 
earnings. The Company expects to adopt the new standard in the fiscal quarter 
ended April 30, 2000.  The effect of adopting this standard is currently 
being evaluated, but it is not expected to have a material effect on the 
Company's financial position or results of operations. 


                                  Page 7 of 23

<PAGE>

PART I.  FINANCIAL INFORMATION

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
         RESULTS OF OPERATIONS

     When used in this discussion, the words "expects", "anticipates" and 
similar expressions are intended to identify forward-looking statements.  
Such statements, which include statements concerning the timing, availability 
and functionality of products under development, product mix, trends in 
average selling prices, the growth rate of the market for PCs, the percentage 
of export sales and sales to strategic customers, the adoption or retention 
of industry standards, the availability and cost of products from the 
Company's suppliers, manufacturing yields and exchange rate fluctuations are 
subject to risks and uncertainties, including those set forth below under 
"Factors that May Affect Results," that could cause actual results to differ 
materially from those projected.  These forward-looking statements speak only 
as of the date hereof. The Company expressly disclaims any obligation or 
undertaking to release publicly any updates or revisions to any 
forward-looking statements contained herein to reflect any changes in the 
Company's expectations with regard thereto or any changes in events, 
conditions or circumstances on which any such statement is based.
     
OVERVIEW

     The Company designs, develops and markets multimedia accelerators for 
sale to notebook computer manufacturers.  The Company has developed the first 
commercially available high performance silicon technology that integrates 
large DRAM memory with analog and logic circuitry to provide a high 
performance multimedia solution on a single chip.  The Company's 
MagicGraph128 and MagicMedia256 families of pin-compatible multimedia 
accelerators incorporate 128-bit and 256-bit memory buses, respectively.  The 
Company believes these products enable notebook PC manufactures to deliver 
state-of-the-art multimedia capabilities while decreasing power consumption, 
size, system design complexity and cost.

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated certain financial 
data as a percentage of net sales:

<TABLE>
<CAPTION>
                                                             Three Months Ended            Nine Months Ended
                                                                 October 31,                   October 31,
                                                            --------------------          --------------------
                                                             1998           1997           1998           1997
                                                            --------------------          --------------------
<S>                                                         <C>            <C>            <C>            <C>
 Net sales                                                  100.0%         100.0%         100.0%         100.0%
 Cost of sales                                               60.0           58.1           58.7           59.1
                                                            --------------------          --------------------
 Gross margin                                                40.0           41.9           41.3           40.9
 Operating expenses:
   Research and development                                  13.0           13.2           13.2           13.4
   Selling, general and administrative                        8.6            9.3            8.9           10.1
                                                            --------------------          --------------------
       Total operating expenses                              21.6           22.5           22.1           23.5
                                                            --------------------          --------------------
 Income from operations                                      18.4           19.4           19.2           17.4
 Other income (expense):
       Interest income and other                              1.5            2.2            1.7            2.2
       Interest expense                                       (.4)           (.9)           (.6)          (1.1)
                                                            --------------------          --------------------
 Income before income taxes                                  19.5           20.7           20.3           18.5
 Provision for income taxes                                   6.8            3.1            7.1            2.8
                                                            --------------------          --------------------
 Net income                                                 12.7%          17.6%          13.2%          15.7%
                                                            --------------------          --------------------
                                                            --------------------          --------------------
</TABLE>


                                  Page 8 of 23

<PAGE>

NET SALES

     The Company's net sales to date have been generated from the sale of its 
multimedia accelerators.  The Company's products are used in, and its 
business is dependent on, the personal computer industry, with sales 
primarily in Asia, Japan, and the United States.  Net sales were $67.4 
million for the three months ended October 31, 1998, compared to $37.1 
million for the three months ended October 31, 1997.  Net sales were $168.5 
million for the nine months ended October 31, 1998, compared to $80.0 million 
for the nine months ended October 31, 1997.  Net sales increased primarily as 
a result of increased market acceptance of the Company's MagicGraph128 
products, introduction by the Company of its MagicMedia256 product family 
which expanded the portion of the market addressed by NeoMagic products, and 
the Company's investment in sales and marketing activities.  The Company 
expects that the percentage of its net sales represented by any one product 
or type of product may change significantly from period to period as new 
products are introduced and existing products reach the end of their product 
life cycles.  Due to competitive price pressures, the Company's products 
experience declining unit average selling prices over time, which at times 
can be substantial.

     Export sales accounted for 89.0% and 83.1% of net sales in the three 
months ended October 31, 1998 and 1997, respectively.  Export sales accounted 
for 88.3% and 82.8% of net sales in the nine months ended October 31, 1998 
and 1997, respectively.  Approximately 50% and 58% of export sales for the 
three and nine months ended October 31, 1998 were to affiliates of United 
States customers. The Company expects that export sales will continue to 
represent a significant portion of net sales, although there can be no 
assurance that export sales as a percentage of net sales will remain at 
current levels.  All sale transactions were denominated in U.S. dollars.

     Four customers accounted for 23.7%, 16.8%, 11.0% and 10.2%, respectively 
of net sales for the three months ended October 31, 1998. Five customers 
accounted for 16.0%, 15.4%, 14.1%, 12.8% and 10.5%, respectively of net sales 
for the three months ended October 31, 1997.  Three customers accounted for 
21.0%, 17.9% and 10.6%, respectively of net sales for the nine months ended 
October 31, 1998. Five customers accounted for 16.7%, 15.8%, 14.7%, 12.3% and 
11.0%, respectively of net sales for the nine months ended October 31, 1997.  
The Company expects a significant portion of its future sales to remain 
concentrated within a limited number of strategic customers.  There can be no 
assurance that the Company will be able to retain its strategic customers or 
that such customers will not cancel or reschedule orders or, in the event 
orders are canceled, that such orders will be replaced by other sales.  In 
addition, sales to any particular customer may fluctuate significantly from 
quarter to quarter.  The occurrence of any such events or the loss of a 
strategic customer could have a materially adverse effect on the Company's 
operating results.

GROSS MARGIN

     Gross margins were $27.0 million and $15.6 million for the three months 
ended October 31, 1998 and 1997, respectively. Gross margin as a percent of 
net sales decreased to 40.0% for the three months ended October 31, 1998 from 
41.9% in the three months ended October 31, 1997.  The decrease in gross 
margin percentage was due primarily to declining average selling prices, 
partially offset by declining average product costs.  Gross margin was $69.5 
million and $32.7 million for the nine months ended October 31, 1998 and 
1997, respectively. Gross margin percentages increased to 41.3% for the nine 
months ended October 31, 1998 from 40.9% in the nine months ended October 31, 
1997.  The increase in gross margin percentage was due primarily to lower 
wafer pricing and improved yields, partially offset by declining average 
selling prices.

     In the future, the Company's gross margin percentages may be adversely 
affected by increased competition and related decreases in unit average 
selling prices, the timing of volume shipments of new products, the 
availability and cost of products from the Company's suppliers, foreign 
currency exchange rate fluctuations, manufacturing yields and changes in the 
mix of products sold.


                                  Page 9 of 23

<PAGE>

RESEARCH AND DEVELOPMENT EXPENSES

     Research and development expenses were $8.7 million and $4.9 million for
the three months ended October 31, 1998 and 1997, respectively.  Research and
development expenses were $22.3 million and $10.7 million for the nine months
ended October 31, 1998 and 1997, respectively.  The Company has made, and
intends to continue to make, significant investments in research and development
to remain competitive by developing new and enhanced products to serve its
identified markets. Research and development expenses increased primarily as a
result of increased employee related expenses largely related to additional
personnel and to a lesser extent consulting, engineering and equipment related
expenses.  Research and development spending will increase in absolute dollars
in fiscal 1999 as compared to fiscal 1998. 

SALES, GENERAL AND ADMINISTRATIVE EXPENSES

     Sales, general and administrative expenses were $5.8 million and $3.5
million in the three months ending October 31, 1998 and 1997, respectively. 
Sales, general and administrative expenses were $15.0 million and $8.1 million
in the nine months ending October 31, 1998 and 1997, respectively.  Sales,
general and administrative expenses increased primarily as a result of increased
commissions associated with higher sales and increased employee related expenses
largely related to additional personnel. Sales, general and administrative
expenses will increase in absolute dollars in fiscal 1999 as compared to fiscal
1998.

OTHER INCOME (EXPENSE)

     Other income (expense), net increased to $794,000 in the three months ended
October 31, 1998 from $498,000 in the three months ended October 31, 1997. 
Other income (expense), net increased to $2.0 million in the nine months ended
October 31, 1998 from $922,000 in the nine months ended October 31, 1997.  The
increase in other income (expense), net is due primarily to additional interest
income resulting from higher average amounts of cash and short-term investments
in the three and nine months ended October 31, 1998 compared to the same periods
in 1997. 

INCOME TAXES

     The Company's effective tax rate for the three and nine months ended
October 31, 1998 was 35% compared to an effective tax rate for the three and
nine months ended October 31, 1997 of 15%.  The lower effective tax rate for the
three and nine months ended October 31, 1997 is primarily due to the utilization
of the Company's net operating loss carryforwards.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's cash, cash equivalents and short-term investments increased
$3.3 million in the nine months ended October 31, 1998 to $74.3 million from
$71.0 million at January 31, 1998.  The increase is primarily due to cash
provided by operating activities, offset in part by increased payments against
the working capital line of credit. In January 1998, in exchange for a lower
commission rate, the payment term on wafer purchases was changed from payable in
90 days from shipment to payable in 30 days from shipment.  Working capital
increased $22.4 million to $75.3 million at October 31, 1998 from $52.9 million
at January 31, 1998.

     The Company generated approximately $27.1 million of net cash in its
operating activities during the nine months ended October 31, 1998 compared to
$13.8 million of net cash generated from operating activities during the
comparable period in the prior year.  The increase in cash generated from
operations is primarily attributable to an $8.0 million increase in accounts
payable and a $9.6 million increase in net income from the nine month period
ended October 31, 1998 compared to the same period the prior year. 
     
     Net cash provided by investing activities for the nine months ended October
31, 1998 was $9.5 million, compared to cash used by investing activities of
$41.3 million for the nine months ended October


                                    Page 10 of 23
<PAGE>

31, 1997.  The increase in cash provided by investing activities for the nine 
month period ended October 31, 1998 compared to the cash used for investing 
activities the nine month period ended October 31, 1997 was primarily due to 
a reduction in the net purchases and maturities of short-term investments of 
$52.1 million, offset in part by an increase of $1.4 million of investments 
in property and equipment.  The larger purchases of short-term investments 
during the nine months ended October 31, 1997 was related to the investment 
of funds generated from the initial public offering.  Continued expansion of 
the Company's business may require higher levels of capital equipment 
purchases, technology investments, foundry investments and other payments to 
secure manufacturing capacity.  The timing and amount of future investments 
will depend primarily upon the growth of the Company's future revenues.

     Net cash used in financing activities for the nine months ended October 31,
1998 was $19.4 million compared to net cash provided by financing activities of
$38.1 for the nine months ended October 31, 1997.  Net cash used in financing
activities for the nine months ended October 31, 1998 relates primarily to
repayments against the working capital line of credit of $21.0 million offset in
part by net proceeds from the issuance of common stock of $2.0 million.  Net
cash provided by financing activities for the nine months ended October 31, 1997
related primarily to net proceeds from the initial public offering of $37.8
million and the release of amounts previously held as restricted cash.

     At October 31, 1998 the Company's principal sources of liquidity included
cash and cash equivalents and short-term investments of $74.3 million.  The
Company believes these available funds and anticipated funds from operations
will satisfy the Company's projected working capital and capital expenditure
requirements through the next 12 months.  Cash may also be used to acquire
technologies. The Company's future capital requirements will depend upon many
factors including the rate of net sales growth, the timing and extent of
spending to support research and development programs in new and existing areas
of technology, expansion of sales and marketing, the timing of introductions of
new products and enhancements to existing products and market acceptance of the
Company's products.  The Company expects that it may need to raise additional
equity or debt financing in the future.  There can be no assurance that
additional equity or debt financing, if required, will be available on
acceptable terms or at all.  

IMPACT OF YEAR 2000 

     Like many other companies, the year 2000 computer issue creates risks for
NeoMagic Corporation.  If computer systems do not correctly recognize and
process date information beyond calendar year 1999, there could be an adverse
impact on the Company's operations. Computer programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000.  

     The Company has completed an initial assessment of its internal computer
systems, and does not believe that it will be required to modify or replace
significant portions of its internal systems so that they will function properly
with respect to dates in the year 2000 and thereafter.   The Company's internal
computer systems consist primarily of third party software tools for
engineering, sales, finance and human resources functions.  The Company has made
inquiries of the software vendors and has been provided assurances that their
software either currently is, or soon will be, year 2000 capable. 

     NeoMagic does not operate its own manufacturing facilities.  Rather, the
Company's products are manufactured and tested by independent third party
suppliers, primarily located in Asia and Japan.   The Company believes that its
most reasonably likely worst case year 2000 scenario would relate to problems
with its third party suppliers rather than with the Company's internal systems
or its products.  The Company is contacting critical suppliers of products and
services to determine that the suppliers' operations and the products and
services they provide are year 2000 capable. Highest priority is being placed on
working with suppliers that are critical to the delivery of the Company's
product to customers.  A worst case scenario involving a critical supplier would
be the partial or complete shutdown of the supplier and its resulting inability
to provide its products or services to the Company on a timely basis.  The
Company will monitor its suppliers and will develop contingency plans to address
issues related to suppliers that are not considered to be taking all steps
necessary to ensure year 2000 capability.  Where efforts to work with critical
suppliers to ensure year 2000 capability have not been successful, contingency
planning generally emphasizes the


                                    Page 11 of 23
<PAGE>

identification of substitute and second-source supplier sites or planned 
increases in inventory levels of specific products. This contingency planning 
is expected to continue through 1999.  

     The Company's year 2000 efforts to date have largely been carried out 
with existing personnel, and the costs incurred to date have not been 
significant. Management believes that any costs to be incurred to assure that 
its internal systems and products are year 2000 capable will not have a 
material adverse effect on the Company's financial position or results of 
operations.  However, the Company is not in a position to identify or to 
avoid all possible adverse year 2000 scenarios, particularly as it relates to 
its third party suppliers. Due to the large number of variables involved, the 
Company cannot provide an estimate of the damage it might suffer if any of 
these adverse scenarios were to occur. As such, there can be no assurance 
that the failure to ensure year 2000 capability by a supplier or another 
third party would not have a material adverse effect on the Company's 
financial condition or overall results of operations.

FACTORS THAT MAY AFFECT RESULTS

FLUCTUATIONS IN QUARTERLY OPERATING RESULTS

     NeoMagic's quarterly and annual results of operations are affected by a 
variety of factors that could have a material adverse effect on net sales, 
gross margin and income from operations.  These factors include, among 
others, demand for the Company's products; changes in product or customer 
mix; incorrect forecasting of future revenues; seasonality associated with 
the tendency of PC sales to increase in the second half of each calendar 
year; competitive pressures resulting in lower average selling prices; 
unanticipated delays or problems in the introduction or performance of the 
Company's next generation of products; the Company's ability to introduce new 
products in accordance with OEM design requirements and design cycles; market 
acceptance of the products of the Company's customers; OEM introduction of 
low-end notebooks resulting in lower average selling prices; changes in the 
timing of product orders due to unexpected delays in the introduction of 
products of the Company's customers or due to the life cycles of such 
customers' products ending earlier than anticipated; new product 
announcements or product introductions by NeoMagic's competitors; the volume 
of orders that are received and can be fulfilled in a quarter; the 
rescheduling or cancellation of orders by customers which cannot be replaced 
with orders from other customers; fluctuations in manufacturing yields; 
fluctuations in foreign exchange rates;  availability and cost of 
manufacturing capacity; supply constraints for the other components 
incorporated into its customers' notebook PC products; the unanticipated loss 
of any strategic relationship; the level of expenditures for research and 
development and sales, general and administrative functions of the Company; 
costs associated with future litigation; and costs associated with protecting 
the Company's intellectual property.  Any one or more of these factors could 
result in the Company failing to achieve its expectations as to future 
revenues.  The Company may be unable to adjust spending sufficiently in a 
timely manner to compensate for any unexpected sales shortfall, which could 
materially adversely affect quarterly operating results.  Accordingly, the 
Company believes that period-to-period comparisons of its operating results 
should not be relied upon as an indication of future performance.  In 
addition, the results of any quarterly period are not indicative of results 
to be expected for a full fiscal year.  In future quarters, the Company's 
operating results may be below the expectations of public market analysts or 
investors.  In such event, the market price of the Company's Common Stock 
would be materially adversely affected.

RISKS ASSOCIATED WITH DEPENDENCE ON THE NOTEBOOK PC MARKET

     The Company's products are used only in notebook PCs.  The notebook PC
market is characterized by rapidly changing technology, evolving industry
standards, frequent new product introductions and significant price competition,
resulting in short product life cycles and regular reductions of average selling
prices over the life of a specific product.  Although the notebook PC market has
grown substantially in recent years, there is no assurance that such growth will
continue.  A reduction in sales of notebook PCs, or a reduction in the growth
rate of such sales, would likely reduce demand for the Company's products. 
Moreover, such changes in demand could be large and sudden.  Since PC
manufacturers often build inventories during periods of anticipated growth, they
may be left with excess inventories if growth slows or if they have incorrectly
forecasted product transitions.  In such cases, the PC manufacturers may
abruptly


                                    Page 12 of 23
<PAGE>

suspend substantially all purchases of additional inventory from suppliers 
such as the Company until the excess inventory has been absorbed.  Any 
reduction in the demand for notebook PCs in general, or for a particular 
product that incorporates the Company's multimedia accelerators, could have a 
material adverse impact on the Company's business, financial condition and 
results of operations.

     The Company's ability to compete in the future will depend on its ability
to identify and ensure compliance with evolving industry standards. 
Unanticipated changes in industry standards could render the Company's products
incompatible with products developed by major hardware manufacturers and
software developers, including Intel Corporation and Microsoft Corporation.  The
Company could be required, as a result, to invest significant time and effort to
redesign its products to ensure compliance with relevant standards.  If the
Company's products are not in compliance with prevailing industry standards for
a significant period of time, the Company could miss opportunities to achieve
crucial design wins, which could result in a material adverse effect on the
Company's business, financial condition and results of operations.  In addition,
the Company's products are designed to afford the notebook PC manufacturer
significant advantages with respect to product performance, power consumption
and size.  To the extent that future developments in other notebook PC
components or subassemblies incorporate one or more of the advantages offered by
the Company's products, the market demand for the Company's products may be
negatively impacted, which could result in a material adverse effect on the
Company's business, financial condition and results of operations.

PRODUCT CONCENTRATION; RISKS ASSOCIATED WITH MULTIMEDIA PRODUCTS

     The Company's revenues are entirely dependent on the market for multimedia
accelerators for notebook PCs, and on the Company's ability to compete in that
market.  Since the Company has no other product line, the Company's revenues and
results of operations would be materially adversely affected if for any reason
it were unsuccessful in selling multimedia accelerators.  The notebook PC market
frequently undergoes transitions in which products rapidly incorporate new
features and performance standards on an industry-wide basis.  If the Company's
products are unable at the beginning of each such transition to support the new
feature sets or performance levels being required by notebook PC manufacturers,
the Company would likely lose design wins and moreover, not have the opportunity
to compete for new design wins until it was able to incorporate changes
resulting from market transitions or to take advantage of future product
transitions.  Thus, a failure to develop products with required feature sets or
performance standards or a delay as short as a few months in bringing a new
product to market could significantly reduce the Company's net sales for a
substantial period, which would have a material adverse effect on the Company's
business, financial condition and results of operations.

     The notebook PC multimedia market is characterized by extreme price
competition.  Leading-edge products may command higher average selling prices,
but prices decline throughout the product life cycle as comparable and more
advanced products are introduced into the market.  As a result, the Company's
ability to maintain average selling prices and gross margins depends
substantially on its ability to continue introducing new products.  Its ability
to maintain gross margins is also dependent upon its ability to reduce product
costs throughout a product life cycle by instituting cost reduction design
changes and yield improvements, persuading customers to adopt cost-reduced
versions of its products and successfully managing its manufacturing and
subcontractor relationships. The failure of the Company to continue designing
and introducing advanced products in a timely manner or to continue reducing
product costs would have a material adverse effect on the Company's net sales,
gross margins and results of operations.

CUSTOMER CONCENTRATION

     The Company's sales are concentrated within a limited customer base.  
The Company expects that a small number of customers will continue to account 
for a substantial portion of its net sales for the foreseeable future.  
Furthermore, the majority of the Company's sales are made on the basis of 
purchase orders rather than pursuant to long-term agreements.  As a result, 
the Company's business, financial condition and results of operations could 
be materially adversely affected by the decision of a single


                                 Page 13 of 23
<PAGE>

customer to cease using the Company's products or by a decline in the number 
of notebook PCs sold by a single customer.

EFFECTS OF CHANGES IN DRAM PRICING

     The Company's products feature large DRAM memory integrated with analog 
and logic circuitry on a single chip, while its competitors often provide 
only the graphics/video analog and logic circuitry on a separate chip to be 
used in conjunction with DRAMs supplied by others.  The selling prices of the 
Company's products reflect many factors, including the prices of DRAM chips. 
A significant reduction in the price of DRAMs could cause the Company's 
products to be less competitively priced, potentially effecting ongoing 
product pricing as well as resulting in the loss of design wins for new 
notebook PCs.  In this circumstance, competitors without embedded DRAM 
potentially could be benefited by DRAM price reductions, and the Company 
could be forced to respond to pricing pressures precipitated by changes in 
the DRAM market by reducing the average selling prices of its products to 
current and prospective customers.  Recently, the DRAM market has experienced 
significant price erosion, which has been a factor in the overall decline in 
the average selling price of the Company's products.  Because the Company's 
product costs cannot be adjusted as rapidly as changes in average selling 
prices to system manufacturers, the Company's business, financial condition 
and results of operations may be materially and adversely affected by 
unanticipated changes in the price of DRAM. 

COMPETITION

     The market for multimedia accelerators for notebook PCs in which the 
Company competes is intensely competitive and is characterized by rapid 
technological change, evolving industry standards and declining average 
selling prices.  NeoMagic believes that the principal factors of competition 
in this market are performance, price, features, power consumption, size and 
software support.  The ability of the Company to compete successfully in the 
rapidly evolving notebook PC market depends on a number of factors, including 
success in designing and subcontracting the manufacture of new products that 
implement new technologies, product quality, reliability, price, the 
efficiency of production, design wins for NeoMagic's integrated circuits, 
ramp up of production of the Company's products for particular system 
manufacturers, end-user acceptance of the system manufacturers' products, 
market acceptance of competitors' products and general economic conditions.  
There can be no assurance that the Company will be able to compete 
successfully in the future.

     NeoMagic competes with major domestic and international companies, some 
of which have substantially greater financial and other resources than the 
Company with which to pursue engineering, manufacturing, marketing and 
distribution of their products.  The Company's principal competitors include 
ATI Technologies (ATI), Chips & Technologies, Inc. ("Chips & Technologies"- 
in January 1998, Intel Corporation acquired Chips and Technologies), S3 
Incorporated and Trident Microsystems, Inc. ("Trident").  NeoMagic may also 
face increased competition from new entrants into the notebook PC multimedia 
accelerator market including companies currently selling products designed 
for desktop PCs. Some of the Company's competitors, including Chips & 
Technologies and Trident have introduced multimedia accelerator products that 
integrate large DRAM with analog and logic circuitry on a single chip. 
Certain of the Company's competitors may offer products with more 
functionality and / or higher processor speeds at the expense of battery life 
and power consumption than the Company's product offerings.  These feature 
sets may be more competitive for certain applications than the Company's 
products.  Potential competition also could come from manufacturers that 
integrate the multimedia accelerator with other systems components.  For 
example, Cyrix (acquired by National Semiconductor in July 1997) is in 
production of an integrated microprocessor and graphics accelerator. Further, 
several of the Company's competitors have announced plans to develop products 
that integrate the multimedia accelerator with the core logic chip set. The 
successful commercial introduction by competitors of products that integrate 
large DRAM with analog and logic circuitry on a single chip or that eliminate 
the need for a separate multimedia accelerator in notebook PCs could have a 
material adverse effect on the Company's business, financial condition and 
results of operations.

                                 Page 14 of 23
<PAGE>

     Some of the Company's current and potential competitors operate their 
own manufacturing facilities.  Since the Company does not operate its own 
manufacturing facility and must make binding commitments to purchase 
products, it may not be able to reduce its costs and cycle time or adjust its 
production to meet demand as rapidly as companies that operate their own 
facilities, which could have a material adverse effect on its business, 
financial condition and results of operations. In addition, the prices of the 
Company's products reflect many factors, including the prices of DRAM chips 
and non-integrated graphics chips.  Therefore, in some cases, the Company's 
products may be more expensive than competitive multiple chip solutions.  The 
Company in the past has lost and in the future may lose design wins due to 
this price difference.  Furthermore, a significant reduction in the price of 
DRAMs could cause the Company's products to be less competitively priced, 
potentially effecting ongoing product pricing as well as resulting in the 
loss of design wins for new notebook PCs. Uncompetitive pricing and loss of 
design wins could have a material and adverse effect on the Company's 
business, financial condition, and results of operations.

DEPENDENCE ON MANUFACTURING RELATIONSHIPS
     
     The Company's products require wafers manufactured with state-of-the-art 
fabrication equipment and techniques.  The Company's products are primarily 
manufactured by Mitsubishi Electric Corporation ("Mitsubishi Electric") in 
Japan.  In fiscal 1998, the Company began manufacturing wafers with Toshiba 
Corporation ("Toshiba") in Japan.  Each of these manufacturing relationships 
are covered under the terms of a five-year wafer supply agreement.  The 
Company expects that, for the foreseeable future, some of its products will 
be single source manufactured.  Because the lead time needed to establish a 
strategic relationship with a new DRAM partner is at least 12 months and the 
estimated time for a foundry to switch to a new product line is four to nine 
months, there may be no readily available alternative source of supply for 
any specific product.  A manufacturing disruption experienced by either of 
the Company's manufacturing partners would impact the production of the 
Company's product for a substantial period of time, which would have a 
material adverse effect on the Company's business, financial condition and 
results of operations.  Furthermore, in the event that the transition to the 
next generation of manufacturing technologies at Mitsubishi Electric or 
Toshiba is unsuccessful, the Company's business, financial condition and 
results of operations would be materially and adversely affected.

      There are many other risks associated with the Company's dependence 
upon third party manufacturers, including: reduced control over delivery 
schedules, quality assurance, manufacturing yields and cost; the potential 
lack of adequate capacity during periods of excess demand; limited warranties 
on wafers supplied to the Company; and potential misappropriation of NeoMagic 
intellectual property.  The Company is dependent on Mitsubishi Electric and 
Toshiba to produce wafers of acceptable quality and with acceptable 
manufacturing yields, to deliver those wafers to the Company and its 
independent assembly and testing subcontractors on a timely basis and to 
allocate to the Company a portion of their manufacturing capacity sufficient 
to meet the Company's needs.  On occasion, the Company has experienced some 
of these difficulties.  Although the Company's products are designed using 
the process design rules of the particular manufacturer, there can be no 
assurance that either Mitsubishi Electric or Toshiba will be able to achieve 
or maintain acceptable yields or deliver sufficient quantities of wafers on a 
timely basis or at an acceptable cost. Additionally, there can be no 
assurance that either Mitsubishi Electric or Toshiba will continue to devote 
resources to the production of the Company's products or continue to advance 
the process design technologies on which the manufacturing of the Company's 
products are based.  Any such difficulties would have a material adverse 
effect on the Company's business, financial condition and results of 
operations.

     The Company's products are assembled and tested by third party 
subcontractors.  The Company does not have long term agreements with any of 
these subcontractors.  Such assembly and testing is conducted on a purchase 
order basis.  As a result of its reliance on third party subcontractors to 
assemble and test its products, the Company cannot directly control product 
delivery schedules, which could lead to product shortages or quality 
assurance problems that could increase the costs of manufacturing or assembly 
of the Company's products.  Due to the amount of time normally required to 
qualify assembly and test subcontractors, product shipments could be delayed 
significantly if the Company is required to find alternative subcontractors. 
Any problems associated with the delivery, quality or cost of the assembly and

                                 Page 15 of 23
<PAGE>

test of the Company's products could have a material adverse effect on the
Company's business, financial condition and results of operations.

INVENTORY RISK

     Under its wafer supply agreements with Mitsubishi Electric and Toshiba, 
the Company is obligated to provide rolling 12-month forecasts of anticipated 
purchases and to place binding purchase orders three to four months prior to 
shipment from the suppliers.  If the Company cancels a purchase order, it 
must pay cancellation penalties based on the status of work in process or the 
proximity of the cancellation to the delivery date.  Forecasts of monthly 
purchases may not increase or decrease by more than a certain percentage from 
the previous month's forecast without the manufacturer's consent.  Thus, the 
Company must make forecasts and place purchase orders for wafers long before 
it receives purchase orders from its own customers.  This limits the 
Company's ability to react to fluctuations in demand for its products, which 
can be unexpected and dramatic, and from time-to-time will cause the Company 
to have an excess or a shortage of wafers for a particular product. Also, 
there is a trend for customers to increasingly reduce on-site inventories.  
OEM's are increasingly moving to "just in time" relationships with their 
vendors which may shift the inventory carrying risk back to the supplier. 
Further, as a result of the long lead time for manufacturing wafers, 
semiconductor companies such as the Company from time-to-time must take 
charges for excess inventory.  For example, the Company booked charges 
totaling $1.5 million for excess inventory in fiscal 1997.  Significant 
write-offs of excess inventory could materially adversely affect the 
Company's financial condition and results of operations.  Conversely, failure 
to order sufficient wafers would cause the Company to miss revenue 
opportunities and, if significant, could impact sales by the Company's 
customers, which could adversely affect the Company's customer relationships 
and thereby materially adversely affect the Company's business, financial 
condition and results of operations.

MANUFACTURING YIELDS

     The fabrication of semiconductors is a complex and precise process. 
Because NeoMagic's products feature the integration of large DRAM memory with 
analog and logic circuitry on a single chip, a manufacturer must obtain 
acceptable yields of both the memory and logic portions of such products, 
compounding the complexity of the manufacturing process.  As a result, the 
Company may face greater manufacturing challenges than its competitors.  
Minute levels of contaminants in the manufacturing environment, defects in 
masks used to print circuits on a wafer, difficulties in the fabrication 
process or other factors can cause a substantial percentage of wafers to be 
rejected or a significant number of die on each wafer to be nonfunctional.  
Many of these problems are difficult to diagnose and time consuming or 
expensive to remedy. As a result, semiconductor companies often experience 
problems in achieving acceptable wafer manufacturing yields, which are 
represented by the number of good die as a proportion of the total number of 
die on any particular wafer. The Company purchases wafers, not die, and pays 
an agreed price for wafers meeting certain acceptance criteria.  Accordingly, 
the Company bears the risk of the yield of good die from wafers purchased 
meeting the acceptance criteria. Poor yields would materially adversely 
affect the Company's net sales, gross margins and results of operations.

     Semiconductor manufacturing yields are a function both of product 
design, which is developed largely by the Company, and process technology, 
which is typically proprietary to the manufacturer.  Historically, the 
Company has experienced lower yields on new products.  Since low yields may 
result from either design or process technology failures, yield problems may 
not be effectively determined or resolved until an actual product exists that 
can be analyzed and tested to identify process sensitivities relating to the 
design rules that are used.  As a result, yield problems may not be 
identified until well into the production process, and resolution of yield 
problems would require cooperation by and communication between the Company 
and the manufacturer.  For example, a design error that resulted in lower 
than expected yields of finished products caused the Company to take a $1.2 
million charge in fiscal 1997.  This risk is compounded by the offshore 
location of the Company's manufacturers, increasing the effort and time 
required to identify, communicate and resolve manufacturing yield problems.  
As the Company's relationships with additional manufacturing partners 
develop, yields could be adversely affected due to difficulties associated 
with adopting the Company's technology and product design to the proprietary

                                 Page 16 of 23
<PAGE>

process technology and design rules of each manufacturer.  Because of the 
Company's limited access to wafer fabrication capacity from its 
manufacturers, any decrease in manufacturing yields could result in an 
increase in the Company's per unit costs and force the Company to allocate 
its available product supply among its customers, thus potentially adversely 
impacting customer relationships as well as revenues and gross margins.  
There can be no assurance that the Company's manufacturers will achieve or 
maintain acceptable manufacturing yields in the future.  The inability of the 
Company to achieve planned yields from its manufacturers could have a 
material adverse effect on the Company's business, financial condition and 
results of operations.  Furthermore, the Company also faces the risk of 
product recalls resulting from design or manufacturing defects which are not 
discovered during the manufacturing and testing process.  In the event of a 
significant number of product returns, the Company's net sales and gross 
margin could be materially adversely affected.

DEPENDENCE ON NEW PRODUCT DEVELOPMENT; RAPID TECHNOLOGICAL CHANGE

     The Company's business, financial condition and results of operations 
will depend to a significant extent on its ability to maintain its position 
in the market for multimedia accelerator products that integrate large DRAM 
with analog and logic circuitry on a single chip.  As a result, the Company 
believes that significant expenditures for research and development will 
continue to be required in the future.   The notebook PC market for which the 
Company's products are designed is intensely competitive and is characterized 
by rapidly changing technology, evolving industry standards and declining 
average selling prices.  Notebook PC manufacturers demand products 
incorporating rich features and functionality in order to achieve product 
differentiation.  The Company must anticipate the features and functionality 
that the consumer of notebook PCs will demand, incorporate those features and 
functionality into products that meet the exacting design requirements of the 
notebook PC manufacturers, price its products competitively, and introduce 
the products to the market within the limited window of market demand.  For 
example, 3-D, digital audio and DVD functionality are becoming increasingly 
important for notebook PCs.  The Company's ability to compete may depend on 
its ability to incorporate these features in its products.  The success of 
new product introductions is dependent on several factors, including proper 
new product definition, timely completion and introduction of new product 
designs, the ability of Mitsubishi Electric, Toshiba and any additional 
strategic manufacturing partners to effectively design and implement the 
manufacture of new products, quality of new products, differentiation of new 
products from those of the Company's competitors and market acceptance of 
NeoMagic's and its customers' products.  There can be no assurance that the 
products the Company expects to introduce will incorporate the features and 
functionality demanded by system manufacturers and consumers of notebook PCs, 
will be successfully developed, or will be introduced within the appropriate 
window of market demand.  The failure of the Company to successfully 
introduce new products and achieve market acceptance for such products would 
have a material adverse effect on the Company's business, financial condition 
and results of operations.

     The integration of large DRAM memory with analog and logic circuitry on a
single chip is highly complex and is critical to the Company's success.  Because
of the complexity of its products, however, NeoMagic has experienced delays from
time to time in completing development and introduction of new products.  In the
event that there are delays in the completion of development of future products,
including the products currently expected to be announced over the next year,
the Company's business, financial condition and results of operations would be
materially adversely affected.  Although the development cycles for the memory
and logic portions of the Company's products have been relatively synchronized
to date, there can be no assurance that this synchronization will continue in
the future.  In addition, there can be no assurance that fundamental advances in
either the memory or logic components of the Company's products will not
significantly increase the complexity inherent in the design and manufacture of
the Company's products, rendering the Company's product technologically
infeasible or uncompetitive.  The multiple chip solutions offered by some of the
Company's competitors are less complex to design and manufacture than the
Company's integrated products.  As a result, these competitive solutions may be
less expensive, particularly during periods of depressed DRAM prices.  The time
required for competitors to develop and introduce competing products may be
shorter and manufacturing yields may be better than those experienced by the
Company.


                                 Page 17 of 23
<PAGE>

     As the markets for the Company's products continue to develop and
competition increases, NeoMagic anticipates that product life cycles will
shorten and average selling prices will decline.  In particular, average selling
prices and, in some cases, gross margin for each of the Company's products will
decline as such products mature.  Thus, the Company will need to introduce new
products which are compelling enough in order to maintain average selling
prices.  There can be no assurance that the Company will successfully identify
new product opportunities and develop and bring new products to market in a
timely manner, that products or technologies developed by others will not render
NeoMagic's products or technologies obsolete or uncompetitive, or that the 
Company's products will be selected for design into the products of its targeted
customers.  The failure of the Company's new product development efforts would
have a material adverse effect on NeoMagic's business, financial condition and
results of operations.

UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY RIGHTS

     The Company relies in part on patents to protect its intellectual 
property. In the United States, the Company has been issued ten patents, each 
covering certain aspects of the design and architecture of the Company's 
multimedia accelerators.  In addition, the Company has patent applications 
pending in the United States Patent and Trademark Office.  There can be no 
assurance that the Company's pending patent applications, or any future 
applications will be approved.  Further, there can be no assurance that any 
issued patents will provide the Company with significant intellectual 
property protection, competitive advantages, or will not be challenged by 
third parties, or that the patents of others will not have an adverse effect 
on the Company's ability to do business.  In addition, there can be no 
assurance that others will not independently develop similar products, 
duplicate the Company's products or design around any patents that may be 
issued to the Company.

     The Company also relies on a combination of mask work protection, 
trademarks, copyrights, trade secret laws, employee and third-party 
nondisclosure agreements and licensing arrangements to protect its 
intellectual property.  Despite these efforts, there can be no assurance that 
others will not independently develop substantially equivalent intellectual 
property or otherwise gain access to the Company's trade secrets or 
intellectual property, or disclose such intellectual property or trade 
secrets, or that the Company can meaningfully protect its intellectual 
property.  A failure by the Company to meaningfully protect its intellectual 
property could have a material adverse effect on the Company's business, 
financial condition and results of operations.

     As a general matter, the semiconductor industry is characterized by 
substantial litigation regarding patent and other intellectual property 
rights. The Company in the past has been, and in the future may be, notified 
that it may be infringing the intellectual property rights of third parties.  
In November 1994, Cirrus Logic Inc. ("Cirrus Logic") filed suit against the 
Company and certain of its employees claiming, among other things, breach of 
fiduciary duty, breach of and interference with contract and misappropriation 
of trade secrets. The Company and Cirrus Logic settled the lawsuit in June 
1996, but the Company incurred an aggregate of $703,000 in expenses in 
connection with such litigation during fiscal 1995 and fiscal 1996.  This 
settlement did not involve cash payments, but did include a non-solicitation 
provision and certain contingent cross-licensing provisions.  In February 
1997, Cirrus Logic sent the Company written notice asserting that the 
Company's MagicGraph128, MagicGraph128V and MagicGraph128ZV products infringe 
six United States patents held by Cirrus Logic.  Since receiving the notice 
of alleged infringement, the Company has advised Cirrus Logic that the 
Company does not believe that any of its products infringe any claims of the 
patents.  The Company also has undergone a confidential external infringement 
review and has conducted its own internal infringement review, and the 
Company continues to believe that the Cirrus Logic infringement allegations 
are unfounded.  However, there can be no assurances that Cirrus Logic will 
not file a lawsuit against the Company or that the Company would prevail in 
any such litigation.  Any protracted litigation by Cirrus Logic or the 
success of Cirrus Logic in any such litigation could have a material and 
adverse effect on the Company's financial position or results of operations.

     Further, the Company was notified by certain of its customers that a law
suit had been filed and served by a holder of a United States patent asserting
that the video/graphics subsystem in such customers'


                                 Page 18 of 23
<PAGE>

notebook PCs, which use the Company's MagicGraph128 and MagicGraph128V 
products, infringe certain claims of the patent.  The Company may have 
certain indemnification obligations to customers with respect to the 
infringement of third-party intellectual property rights by its products.  
There can be no assurance that the Company's potential obligations to 
indemnify such customers will not have a material adverse effect on the 
Company's business, financial condition and results of operations.  The 
Company believes that the Company's MagicGraph128 and MagicGraph128V products 
do not infringe any of the claims of such patent.  The Company's belief is 
based upon a legal opinion from its patent counsel, Townsend and Townsend and 
Crew LLP.  There can be no assurances that Company or such customers would 
prevail in any patent litigation, or that such customers will continue to 
purchase the Company's products while the Company is under the threat of 
litigation.

     Any patent litigation, whether or not determined in the Company's favor or
settled by the Company, would at a minimum be costly and could divert the
efforts and attention of the Company's management and technical personnel from
productive tasks, which could have a material adverse effect on the Company's
business, financial condition and results of operations.  There can be no
assurance that current or future infringement claims by third parties or claims
for indemnification by other customers or end users of the Company's products
resulting from infringement claims will not be asserted in the future or that
such assertions, if proven to be true, will not materially adversely affect the
Company's business, financial condition and results of operations.  In the event
of any adverse ruling in any such matter, the Company could be required to pay
substantial damages, which could include treble damages, cease the
manufacturing, use and sale of infringing products, discontinue the use of
certain processes or to obtain a license under the intellectual property rights
of the third party claiming infringement.  There can be no assurance, however,
that a license would be available on reasonable terms or at all.  Any
limitations on the Company's ability to market its products, or delays and costs
associated with redesigning its products or payments of license fees to third
parties, or any failure by the Company to develop or license a substitute
technology on commercially reasonable terms could have a material adverse effect
on the Company's business, financial condition and results of operations.

DEPENDENCE ON INTERNATIONAL SALES AND SUPPLIERS

      Export sales are a critical part of the Company's business.  Sales to
customers located outside the United States (including sales to foreign
operations of customers headquartered in the United States and foreign system
manufacturers that sell to United States-based OEMs) accounted for 83.2%, 96.2%
and 90.0% of the Company's net sales for fiscal 1998, 1997 and 1996,
respectively, and 88.3% for the first nine months of fiscal 1999 ended October
31, 1998.  The Company expects that net sales derived from international sales
will continue to represent a significant portion of its total net sales.  Some
of the Company's international sales are supported by letters of credit issued
by its customers.  Because the Company's international sales have to date been
denominated in United States dollars, increases in the value of the United
States dollar could increase the price in local currencies of the Company's
products in foreign markets and make the Company's products relatively more
expensive than competitors' products that are denominated in local currencies. 
All of the Company's wafers are, and for the foreseeable future will be produced
by foreign manufacturers.  In addition, the majority of the assembly and test
services used by the Company are procured from international sources.  Under the
Company's wafer supply agreements with Mitsubishi Electric and Toshiba, products
are priced in Japanese yen.  As a result, the Company's cost of goods sold are
subject to fluctuations in the yen-dollar exchange rates.  The Company has in
the past hedged the majority of its exposure to fluctuations in such foreign
currency exchange rate by purchasing foreign exchange contracts and will
continue to do so in the future.  However, there can be no assurance that such
hedging will be adequate.  Significant wafer or assembly and test service price
increases, fluctuations in currency exchange rates or the Company's hedging
against currency exchange rate fluctuations could have a material adverse effect
on the Company's business, financial condition and results of operations. 

     International sales and manufacturing operations are subject to a variety
of risks, including fluctuations in currency exchange rates, tariffs, import
restrictions and other trade barriers, unexpected changes in regulatory
requirements, longer accounts receivable payment cycles, potentially adverse tax


                                 Page 19 of 23
<PAGE>

consequences and export license requirements.  In addition, the Company is
subject to the risks inherent in conducting business internationally including
foreign government regulation, political and economic instability, and
unexpected changes in diplomatic and trade relationships.  Moreover, the laws of
certain foreign countries in which the Company's products may be developed,
manufactured or sold, including various countries in Asia, may not protect the
Company's intellectual property rights to the same extent as do the laws of the
United States, thus increasing the possibility of piracy of the Company's
products.  There can be no assurance that one or more of these risks will not
have a material adverse effect on the Company's business, financial condition
and results of operations.

IMPACT OF CURRENCY EXCHANGE RATES

     Because the Company currently purchases wafers under purchase contracts
denominated in yen, significant appreciation in the value of the yen relative to
the U.S. dollar would make the wafers relatively more expensive to the Company,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.  The Company from time to time enters into
foreign currency forward contracts and foreign currency options to minimize
foreign currency fluctuation exposures related to these firm purchase
commitments.  The Company does not use derivative financial instruments for
speculative or trading purposes.  The Company's accounting policies for these
instruments are based on the Company's designation of such instruments as
hedging transactions.  The criteria the Company uses for designating an
instrument as a hedge include its effectiveness in risk reduction and one-to-one
matching of derivative instruments to underlying transactions.  Notwithstanding
the measures the Company has adopted, due to the unpredictability and volatility
of currency exchange rates and currency controls, there can be no assurance that
the Company will not experience currency losses in the future, nor can the
Company predict the effect of exchange rate fluctuations upon future operating
results.

NEED FOR ADDITIONAL CAPITAL

     The Company requires substantial working capital to fund its business, 
particularly to finance inventories and accounts receivable and for capital 
expenditures.  The Company believes that its existing capital resources will 
be sufficient to meet the Company's capital requirements through the next 12 
months, although the Company could be required, or could elect, to seek to 
raise additional capital during such period.  The Company's future capital 
requirements will depend on many factors, including the rate of net sales 
growth, the timing and extent of spending to support research and development 
programs in new and existing areas of technology and expansion of sales and 
marketing, the timing of introductions of new products and enhancements to 
existing products and market acceptance of the Company's products.  The 
Company may raise additional equity or debt financing in the future.  There 
can be no assurance that additional equity or debt financing, if required, 
will be available on acceptable terms or at all.

MANAGEMENT OF EXPANDED OPERATIONS
     
     The Company has experienced, and may continue to experience, periods of 
rapid growth and expansion both domestically and internationally, which have 
placed, and could continue to place a significant strain on the Company's 
limited personnel and other resources.  To manage these expanded operations 
effectively, the Company will be required to continue to improve its 
operational, financial and management systems.  The Company is dependent upon 
its ability to successfully hire, train, motivate and manage its employees, 
especially its management and development personnel.  If the Company's 
management is unable to manage its expanded operations effectively, the 
Company's business, financial condition and results of operations could be 
materially adversely affected.

DEPENDENCE ON QUALIFIED PERSONNEL

     The Company's future success depends in part on the continued service of 
its key engineering, sales, marketing, manufacturing, finance and executive 
personnel, and its ability to identify, hire and retain additional personnel. 
There is intense competition for qualified personnel in the semiconductor 
industry, and there can be no assurance that the Company will be able to 
continue to attract and train qualified

                                 Page 20 of 23
<PAGE>

personnel necessary for the development of its business.  The Company's 
anticipated growth is expected to place increased demands on the Company's 
resources and will likely require the addition of new management personnel 
and the development of additional expertise by existing management personnel. 
Loss of the services of, or failure to recruit in a timely manner, key 
technical and management personnel could be significantly detrimental to the 
Company's product development programs or otherwise have a material adverse 
effect on the Company's business, financial condition and results of 
operations.

VOLATILITY OF STOCK PRICE

     The market price of the shares of Common Stock, like that of the common
stock of many other semiconductor companies, has been and is likely to be highly
volatile, and the market has from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies.  The market price of the Common Stock could be subject to
significant fluctuations in response to quarter-to-quarter variations in the
Company's anticipated or actual operating results, announcements of new
products, technological innovations or setbacks by the Company or its
competitors, conditions in the semiconductor and PC industries, unanticipated
shifts in the notebook PC market or industry standards, loss of customers,
changes in DRAM pricing, the commencement of, developments in or outcome of
litigation, changes in or the failure by the Company to meet estimates of the
Company's performance by securities analysts, market conditions for high
technology stocks in general, and other events or factors.


                                 Page 21 of 23
<PAGE>

PART II.  OTHER INFORMATION

ITEM 1.   Legal Proceedings
          None.

ITEM 2.   Changes in Securities and Use of Proceeds
          None.

ITEM 3.   Defaults Upon Senior Securities
          None.

ITEM 4.   Submission of Matters to a Vote of Security Holders
          None.

ITEM 5.   Other Information
          Not applicable.

ITEM 6.  Exhibits and Reports on Form 8-K
         (a) Exhibits

     EXHIBIT 
     NUMBER         DESCRIPTION
     -------        -----------
     27.1           Financial Data Schedule

     (b) Reports on Form 8-K

     The Company did not file any reports on Form 8-K during the nine months
     ended October 31, 1998.


                                 Page 22 of 23
<PAGE>

                                     SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
                                          
                                          
                                          
                                NEOMAGIC CORPORATION
                                    (Registrant)
                                          
                                          
                                          
                                                                 
                                /s/ Merle McClendon
                                -------------------
                                  MERLE MCCLENDON
                              Vice President, Finance
                            and Chief Financial Officer
                    (Principal Financial and Accounting Officer)
                                          
                                  December 10, 1998
                                          








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